Chinese Stocks Bounce On Short-Squeeze Over Funding Hopes

Rumors of a new "preferred shares" program which could implicitly mean easier access to desperately needed liquidity for Chinese banks and real estate developers prompted what one analyst called "a short-covering-led recovery after shares had fallen a lot." The banks of the Shanghai Stock Exchanged rallied notably as chatter was they would be be first to be blessed with the ability to issue new stock and this boosting their capital. The 2.7% rally in the composite was the best day in 4 months (even as China CDS surged by their most in 9 months) but, as one trader noted, "we may see one or two more days of upside but China's fundamentals are still weak. We weren't falling for nothing."

China’s stocks rallied, sending the benchmark index to its biggest gain in four months, amid speculation the government is loosening funding restrictions for property developers and banks to support economic growth.

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The Shanghai Composite Index (SHCOMP) climbed 2.7 percent to 2,047.62 at the close, the biggest gain since Nov. 18, after reaching record-low valuations yesterday. Policy makers are trying to bolster real estate and financial companies as the economy slows and bad debts increase. Allowing lenders to sell preferred shares would give them a new way to meet long-term fundraising requirements.

“Investors hear talk that banks may be the first to be included in the preferred-shares program,” said Xu Shengjun, analyst at Jianghai Securities in Shanghai. “Investors are hoping this will bring a lot of benefits to the companies, including boosting their capital.”

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Companies in the Shanghai Stock Exchange 50 A-Share Index, which includes at least 10 banks, can issue preferred shares, according to a statement posted on the official microblog of the CSRC. They can use the funds to pay for acquisitions and buy back stock, the CSRC said.

Selling the securities would enable banks to have a supply of capital without adding pressure on common stock investors, according to Masterlink Securities Corp. Lenders are facing increasing competition for deposits after the central bank engineered a cash crunch last year to curb off-balance sheet financing that evolved to circumvent official credit curbs.

“This is a short covering-led recovery after shares fell a lot,” said Wong. “We may see one or two more days of upside but China’s fundamentals are still weak. We weren’t falling for nothing.”

Just as that trader noted, this is far from over - as the smattering of headlines from last night suggest:

*CHINA YUAN WEAKENS 0.06% TO 6.2315 VS U.S. DOLLAR

ICBC, CCB STOP SELLING TRUST PRODUCTS: SECURITIES DAILY

China CDS surged 10.5bps (the most in 9 months) and are back over 100bps (5 times that of the USA and double the risk of Japan).

China corporate bonds are at one-month lows.

China warns of risk in insurance industry due to heavy exposure to corporate credit (especially local government debt). Rather stunningly, new debt investment plans by insurance companies last year totaled 287.76b yuan, equal to the sum total amount of the previous seven yrs combined.

More stories of Hong Kong property sellers slashing prices is also raising tensions with at least 10 housing estates seeing sellers cutting prices yesterday. New homes are being discounted at 11.75% discount (and as we noted yesterday, existing homes at over 20%). Barclays warns this is only the start, noting it expects home price to fall by at least 30% by end-2015 from Oct. 2013 level. Current home-price-to-income multiple (13.3x vs historical avg 8.7x) is "very far away" from where end-users can support market

*CHINA TO 'DRASTICALLY' CURB NUMBER OF NEW SHIPYARDS: DAILY - China must restrain blind investment in shipbuilding industry. Li said small and medium-sized shipyards with few orders will gradually withdraw from the market in next 5 yrs: Daily